By DEREK KRAVITZ, Associated Press
WASHINGTON (AP) — He predicted the tech-stock collapse. He foresaw the housing bust.
So naturally, everyone wants to know what Robert Shiller thinks of today's stock prices, now perched at a four-year high. Or about the direction of home prices.
Keep your hopes in check. Shiller is disinclined these days to offer specific predictions about the direction of stocks, home prices or any other asset whose prices can surge or plunge before we can fully grasp what's going on.
In his 2000 book "Irrational Exuberance," Shiller warned of a stock-market bubble. Five years later, Shiller detected a bubble in home prices and argued that it posed a grave threat.
Shiller, a Yale economist, is co-creator of the widely followed Standard & Poor's/Case-Shiller home price index. He has been widely ranked among the most influential economists in the world.
Despite his accurate past warnings, Shiller, 65, is generally skeptical of his profession's ability to foresee shifts in the economy. Much of his recent work focuses on behavioral economics — how psychology drives financial decision-making.
He believes home or stock prices flow from the confidence of consumers or investors. Confidence, in turn, reflects the story lines people invent to frame their memories of events — from stock crashes to housing booms. Ultimately, he says, our financial decisions reflect our emotions and memories more than the state of the economy.
Shiller thinks home prices nationally could fall further. But he isn't certain.
He doesn't think the rising stock market has formed a bubble. Shiller doesn't detect the kind of investor overconfidence that he associates with dangerously high stock prices.
In an interview with The Associated Press, Shiller spoke about the housing market, the stock market, the economy and human behavior. Excerpts appear below, edited for length and clarity.
Q: A lot of housing market experts think home prices have bottomed. You've been more bearish.
A. It's not so much that I'm forecasting falling home prices as that I question whether anyone is able to forecast them right now. They won't fall forever, but they can fall for a long time. I don't know where home prices will be in 10 or 20 years.
Q: If prices do fall further, does it follow that many homeowners will feel less wealthy, and they'll reduce spending and that will slow the economy?
A. Yes, we find that the "wealth effect" is stronger for housing than it is for the stock market. Many stocks are held in retirement portfolios, so people are not as likely to respond to a decline in value there as they would if it were something more immediate. In recent years, the home-equity loan has become very important as a way of sustaining consumption. Now that home prices have fallen, those loans are not so available. It seems pretty obvious that it's going to affect consumption.
Q: What trends would you need to see for a strengthening of prices and then a sustained rise in home prices?
A: One thing that has been encouraging: The National Association of Home Builders' housing market index has been shooting up. Builders are seeing signs of increasing demand. But it remains at a low level. So it's ambiguous evidence. But that might be taken as a sign that the market is improving.
Q: If you were a national housing czar with unilateral authority to do whatever you deemed necessary to help the markets and restore faith, what steps would you take?
A: This crisis was caused substantially by a failure to manage real estate risk properly. And so we should be thinking like financiers about that risk, and how it should be managed. The mortgage institution we have is traditional. There's no reason why we shouldn't rethink it completely. The Dodd-Frank Act called for a study of shared appreciation mortgages. Those are mortgages where the risk of loss and gain on the house is shared with the lender. So if home prices go down, it's not all on the shoulders of the homeowners.
Q: Do you see more rentals and apartments over the next decade? Do you think single-family homeownership will continue on maybe a slow but steady decline?
A: After the Great Stock Market Crash of 1929, people soured on stocks as investments. And I could see that happening with housing. The assumptions people have been making that buying a house is the American dream and that that's what you have to do — that kind of assumption is not ringing so true anymore.